While the stock market rallies, the market for Treasuries is raising the alarm.

Imperial collapse ain’t pretty. This copper engraving of Lisbon, Portugal (circa 1755) shows the city on fire and being swallowed by a Tsunami. An earthquake that year set off the trouble, but wars with Spain and the Oranges would put the final nails in the coffin of the Portuguese Empire. Image courtesy Wikimedia.

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If you needed another reason to hedge the mainstream global economy, look at the way stock traders are betting big on stocks which benefit when inflation picks up. Despite this irrational exuberance, strong signals are coming from elsewhere that these gains will fizzle. In its financial analysis column, the Journal’s Justin Lahart writes:

Active managers of large-capitalization mutual funds have similarly been building holdings of cyclical stocks. But when too many investors start making the same wager, it is often a good time to start betting the other way.

Why now? Because Treasury yields, which rose after the election with stocks, have reversed. The same pattern occurred right before the inflation peaks of 2011, 2014, and early 2016. Lahart continues:

The danger the Treasury market is sniffing out, as they see it, is that Americans once again respond to higher prices by buying less. Even a hint that may be happening might prompt investors to seriously reconsider their enthusiasm for cyclical stocks.

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